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In 1993 the Church of Scientology and the IRS settled longstanding disputes over a variety of tax issues. The Church paid the IRS $12.5 million and the IRS agreed to stop questioning whether the Church was a religion. The Wall Street Journal published a closing agreement that memorialized the deal and the agreement included The IRS also agreed that church members could deduct 80% of the fees paid for "religious training and services." The Wall Street Journal published the closing agreement that memorialized the deal, but the IRS never acknowledged the accuracy of the published version.

Now a Jewish couple is in court, fighting with the IRS about the deductibility of "religious training." The couple deducted tuition they paid to send their children to day school and for after-school training in Jewish law. The IRS denied the deduction and the 9th Circuit Court of Appeals is now considering the case. At oral argument last Monday the judges expressed concern and skepticism over the IRS position:

"The view of the IRS is it can unconstitutionally violate the Constitutuion by establishing religion, by treating one religion more favorably than other religions in terms of what is allowed as deductions, and there can never be any judicial review of that?" Judge Kim Wardlaw asked . . . . "This does intrude into the Establishment Clause."

The IRS is arguing that the taxpayer parents sought to deduct general education, not specialized training of the sort Scientologists can deduct.

At least one donor advised fund is doing well - extremely well. The Boston Globe reports that the Fidelity Charitable Gift Fund, the largest donor advised fund in the country, donated more than $1 billion to charities in 2007. This amount represents an increase of 24% over the amount contributed in 2006. Part of the increase may be due to changes in the way the fund operates. Fidelity now allows donors to create a "giving account" with as little as $5,000, down from a $10,000 minimum. Donors created 6,700 new accounts in 2007, a 44% increase. Fidelity also changed the rules on the minimum amount distributable from an account, reducing the amount from $500 to $100. This change allows donors to make smaller donations to more charities. The news is good for the charities receiving the contributions, and it's also good for Fidelity which takes a 0.6% fee (lower for accounts larger than $500,000).

This paper analyzes three issues critical to understanding the chronic shortage in organs. Section 2 develops a simple economic model of altruism that helps explain how markets with altruistic participants operate in ways similar to ordinary economic markets, but produce an equilibrium position in which more organs are transferred at lower cash prices. Section 3 examines and rejects the various arguments used to undermine the neoclassical arguments in the first section. Section 4 looks at ways to expand the supply of organs: directed donations within families and among friends, solicited organs via matchingdonors.com, donor-recipient pairs, and LifeSharers.

Most countries place various limitations on the ability of charities to conduct business activities in areas unrelated to their charitable purpose. In this paper, I examine this narrow aspect of the legal framework for charities in the United States and Canada. First, I will briefly provide some background on charities' conduct of such activities. Next, I will broadly outline the current law in each country, highlighting key similarities and differences. Then, drawing on historical evidence, I will try to explain why the relevant law in each country developed as it did. Finally, I will evaluate each country's response, focusing not only on the results of each but also on whether the concerns that led to each were well-founded. Through doing so, I will attempt to draw conclusions as to whether there is a clear winner between the two statutory schemes, and if the experiences of each country can provide guidance for future attempts at reform.

The Amherst Student, the student newspaper at Amherst College, today called for bipartisan support of federal legislation that would allow religious organizations to receive direct grants in support of their secular, social welfare activities. Here is the concluding paragraph of a pragmatic, even if idealistic, op-ed piece.

A president who promotes faith-based initiatives could compete for the support of the nearly 120 million Americans who consider themselves to be Christian. There are still, of course, the evangelicals, many of whom focus on their opposition to gay marriage more than on their desire to see the religious charities thrive on government support. However, a new variety of conservative Christians are increasing in number. These “new” evangelicals appear to view government as much as a tool for furthering social justice as for legislating Christian values. According to Pew surveys, two-thirds of professed evangelicals favor churches that are willing to apply for federal grants. Once we prioritize the universal desire to alleviate poverty, churches will have greater resources with which to do good, and more young Americans of faith will take action in social service ministries, thus avoiding being sucked into the quagmire of partisan politics. Religion must not be too separate from the state, when the church is useful in the “secular” sense. At some point, both partisan wings should swallow their hostilities and tend to the crisis of poverty that continues to rage.

I like to see students, especially undergraduates, engaged in issues of the day -- the way students were (or are least were portrayed as having been) engaged in important issues of the day during the 60's. I must really be getting old.

Congratulations are due to the University of Illinois and Professor John D. Columbo. The University of Illinois recently received a $1.3 million gift from June E. Michael in honor of Professor Columbo. According to the TaxProf Blog, the gift will be used to create the John D. Columbo Professorship in Law and to fund need-based scholarships. Quiet and friendly, always smiling, Professor Columbo personifies all that is good and effective about the nonprofit sector. He is a prolific writer and scholar of tax exemption law -- his work with regard to nonprofit hospitals is especially groundbreaking -- and always willing to help younger scholars (he helped me tremendously when I first arrived at the academy). I remember struggling for years to understand the "integral part" doctrine until finally coming across an absolutely masterful article John wrote on the topic and suddenly I understood. See, John D. Columbo, The IHC Cases: A Catch-22 for Integral part Analysis, A Requiem for Rev.Rul. 69-545, 34 Exempt Organization Tax Review 401 (2001). John is one of the smartest thinkers in the field who probably could have made $1.3 million annually several times over working in the private sector instead of devoting his life to positively affecting the lives of hundreds and thousands of students and scholars who came to law school with the crazy idea that nonprofit organizations can actually make a positive difference in our society. We need 100 more people just like him. It is just so nice to see an absolutely unselfish good guy get rewarded for quiet service. Thanks John.

The New York Times reported on February 7, 2008, that the long-time Chief Executive Officer of the Bill and Melinda Gates Foundation, Patty Stonesifer, will step down from her position as CEO by the end of the year. Here is an excerpt from the article:

With $37 billion in assets, it is nearly four times the size of the next largest foundation. It dispenses more than $3 billion annually, more than five times the amount distributed by the Ford Foundation, and will have some 800 employees by year’s end.

“This job is mind-boggling because it requires a wholly different skill set than any other job in the philanthropic world,” said Harvey P. Dale, a professor of philanthropy and nonprofit law at New York University. “It’s an enormous challenge.”

Ms. Stonesifer, 51, who has worked for a dollar a year after earning millions as a senior executive at Microsoft, said she was comfortable stepping down now because she believed the foundation had firmly established strategies for achieving its primary goals of improving health, education and nutrition around the world.

The rule that charities are not allowed to intervene in political campaigns has now been in place for over fifty years. Despite uncertainty about the exact reasons for Congress' enactment of it, skepticism by some about its validity for both constitutional and public policy reasons, and continued confusion about its exact parameters, this rule has survived virtually unchanged for all of those years. Yet while overall noncompliance with the income tax laws has drawn significant scholarly attention, few scholars have focused on violations of this prohibition and the IRS' attempts to enforce it.

This Article focuses on the elusive issue of how extensive is noncompliance with this prohibition and how could the IRS improve its enforcement in this area. The limited data available about the extent of noncompliance indicates that while violations involving extensive expenditures or high profile activities are relatively rare, minor and probably mostly inadvertent violations may be much more widespread than current IRS enforcement figures would indicate. Such violations should be of concern because they risk creating a culture of noncompliance, they may harm the public's trust in both the violating charities and the charitable sector as a whole, and they may have significant effects on the outcome of political campaigns because of the public's generally high regard for charities. To address these violations, the Treasury Department and the IRS should adopt three strategies. First, the IRS should reduce its reliance on third-party complaints by pro-actively looking in publicly available information for possible violations, including by reviewing websites, media reports, and state campaign finance filings. Second, the Treasury Department should adopt an approach that has generally worked in other tax contexts by clarifying the vague boundaries of the prohibition through creating safe harbors for the most common election-related activities, while retaining the current facts and circumstances approach as an anti-abuse rule. Third and finally, the IRS should continue to fully utilize the flexibility of the existing penalty regime to tailor penalties to match violations, issuing only âwarning ticketsâ for first time, apparently unintentional violators while reserving financial penalties and revocation of tax-exempt status for repeat and intentional violators.

Independent political organizations have become increasingly active in political advocacy and in their attempts to influence elections. These independent political organizations generally organize as non-profit organizations and are not directly associated with a candidate or political party. The groups either seek to promote issues associated with candidates running for office, or seek to influence an election in favor of or in opposition to a specific candidate. As these organizations have become more involved in political advocacy, campaign finance reform advocates have pressed for further regulation of these entities. Attempts to regulate the activities of independent groups are often in tension with First Amendment principles. The Supreme Court's decision in Federal Election Commission v. Wisconsin Right to Life significantly rolled back some of the restrictions placed on independent groups, and this decision may encourage Congress to seek alternative means of regulating campaign activities.

In the past, Congress has regulated independent political groups by putting restrictions on the entity structures under which these entities are organized. For example, as a condition of receiving tax-exempt status under section 527 (as a political organization) an entity must disclose the contributions it receives and its expenditures. Some in Congress and in academia have argued that section 527 political organizations should be regulated under election law as political committees. This article examines whether an organization could avoid some of these restrictions by forgoing tax-exempt status and organizing as a taxable organization. Proponents of such a move argue that political organizations have no taxable income and there would therefore be no consequences to organizing as political organizations. This article examines the characteristics that independent organizations seek when choosing an organizational form and discusses various tax theories that provide the basis for examining the tax implications of an organization's forgoing tax-exempt status. The article concludes that there will be significant tax implications to an independent political group that decides to forgo tax-exempt status and that taxable independent groups are not an ideal mechanism for avoiding restrictions on non-profit organizations.

Recent developments - such as a wave of FEC enforcement actions, the FEC's publication of its case by case approach to determining political committee status, and the Supreme Court's decision in FEC v. Wisconsin Right to Life - have made it necessary to reconsider the kinds of campaign finance reforms desirable and constitutionally permissible. This Article examines the proposition that, if section 527 groups and groups exempt under section 501 of the Internal Revenue Code are part of a network of commonly managed organizations, then the FEC should decide whether they need to register as political committees under the Federal Election Campaign Act (FECA) by looking at their relationships with other members of the network in addition to evaluating the character of these groups viewed in isolation.

In 2006 the Campaign Finance Institute issued a report looking twelve nationally important nonprofits that had been active in the 2004 election. It found that in ten of the twelve cases, a section 527 group that had not registered with the FEC had an affiliated group that was expressly involved in promoting the candidacy of one or more individuals who were running for a federal office. Sometimes the affiliated group was a PAC registered with the FEC and sometimes it was a 501(c) organization engaged in political campaign activity. Based largely upon the study's findings, I develop my recommendation for a network approach to determining political committee status.

I then examine two potential First Amendment barriers to implementing the approach I recommend. According to the first, which is based upon a line of cases starting with Regan v. Taxation with Representation of Washington, the government cannot condition tax and other financial benefit for a potential recipient on its surrendering free speech rights that it otherwise would have unless there is an alternate channel available for the recipient to exercise those rights. The second depends upon the reasoning of the Supreme Court in, which limits the ability of the FEC to examine the context surrounding campaign messages in deciding whether electioneering communications have occurred. I argue that both of these constitutional obstacles can be overcome and, thus, that a network approach to political committee status is desirable from a public policy point of view and constitutionally valid.

The IRS has issued Fact Sheet 2008-14 detailing the methods and circumstances by and under which it conducts examinations and compliance checks of exempt organizations. Here is an exerpt generally describing the reasons the IRS might begin an inquiry:

Selecting Organizations for Examination or Compliance Checks

EO strives to ensure consistency and fairness in its examination and compliance check processes. In its annual Implementing Guidelines, which are available on the IRS website at www.irs.gov/eo, EO describes its proposed examination and compliance check activities for the year. EO designs and implements comprehensive projects to address issues that carry the most non-compliance risk. To determine which organizations should be targeted, experienced specialists analyze information from Forms 990 and other sources. This analysis will usually result in the selection of a group of returns for examination or compliance check. EO also reviews media reports and receives complaints from the general public and Congress about potential non-compliance by exempt organizations. After confirming the information, and when appropriate, these organizations may be selected for examination or to receive a compliance check. For details on how EO handles complaints about exempt organizations, see Fact Sheet 2008-13. Regardless of the process used to select returns, EO does not presume that an organization is violating the tax laws before it begins the examination or sends a compliance check letter.

In addition, Fact Sheet 2008-13 describes the methods by which members of the public can make complaints about exempt organizations and how the IRS responds:

The Review Process

Upon receipt, research is done to confirm the identity of the organization in question and once this is complete, information is entered into a database to help the IRS keep track of the progress of the review. An experienced EO revenue agent then performs a thorough technical analysis of the allegation made on the referral. The agent uses a “reasonable belief” standard to evaluate the facts and to determine whether EO should take further action. Before taking action, the revenue agent must determine that the facts create a reasonable belief that the allegations may be true when considered fairly and in light of other reliable information. The reviewing EO agent will decide one of the following:

The information does not warrant further action. In this case, the agent inputs information, including rationale, into the database and closes the referral.

The referral relates to activities that should be considered at a future date. The agent documents the database and schedules the appropriate date to re-evaluate the information.

The referral contains characteristics that require it to be forwarded to a committee of career EO managers and agents. This committee evaluates referrals monthly -- more often in some circumstances -- and decides whether to proceed with an examination. The committee also applies the “reasonable belief” standard.

The information warrants an examination of the organization. The agent documents his or her decision and the reasons for it in the database. The information item then becomes part of the examination file.

If this process results in a decision to examine an organization, the Classification Office will forward the case to a field group for assignment to a revenue agent. The revenue agent will contact the organization and schedule an appointment to begin the examination. (For details on the EO examination process, see Fact Sheet 2008-14.)

In the summer of 2006, the Uniform Law Commission approved the Uniform Prudent Management of Institutional Funds Act (UPMIFA). This act replaces (or will, when states enact it) UMIFA, the Rodney Dangerfield of charitable law. (Really, how many of you even know about UMIFA - or new about it before work began on UPMIFA). Although UPMIFA is old news by blogging standards, it seems useful to post some baseline information, so that as the legislative season progresses, we can blog about enactments and nonuniform amendments to the act.

UPMIFA does three things:

Provides a standard for investing and managing charitable funds. The standard is prudence and the act draws language from the Revised Model Nonprofit Corporation Act (the good faith, ordinarily prudent person standard) and from the Uniform Prudent Investor Act (guidelines as to what constitutes prudent behavior in an investment context).

Provides a spending rule for endowment funds, if a donor hasn't specified (very specifically) a rule contrary to the rule of prudence in the act.

Applies the rules of cy pres and equitable deviation to restrictions on funds held by nonprofit corporations, and creates a new rule that permits a charity to apply cy pres to an old (more than 20 years) and small (less than $25,000) fund without going to court (but after notifying the Attorney General).

Twelve states have bills introduced already this session, and more introductions are likely. The twelve are Alabama, Arizona, Colorado, Georgia, Kansas, Michigan, New Hampshire, New Mexico, South Carolina, Vermont, Virginia, and West Virginia.

The Uniform Law Commission's website provides information about the act, including a copy of the act. The ULC updates the list of enactments and introductions weekly.

Last November Mart Green gave Oral Roberts University $70 million to rescue the school after its president stepped down amid allegations of misspending. Green made the gift, which put the Green family 27th on the Chronicle of Philanthropy list of the largest charitable donors in 2007, despite having no prior connection with the University. Green is now Chair of the Board of Trustees of Oral Roberts, and in that capacity he will work to restore trust in the University and will help to rebuild public trust in the school. The Chicago Tribune provides an interesting look at Mart Green and why charitable giving is such an important part of his life.

The Globe and Mail reports that British Columbia has begun to review applications made by organizations seeking to register as nonprofit societies for possible links to terrorist groups. One concern is that the Canadian government or the United Nations may identify a group as a terrorist organization, but that information may not be shared directly with authorities in British Columbia. Increased scrutiny is likely.

A California bill captioned "Foundations: Diversity" passed out of the House on Jan. 29 and is now being considered by the Senate. Assembly Bill 624 as introduced applied to private foundations and has been amended to apply to "private, corporate, or private operating foundations."

The legislative counsel's digest describes the bill as follows:

This bill would require a private, corporate, or public operating foundation with assets over $250,000,000 to collect specified ethnic, gender, and sexual orientation data pertaining to its governance and grantmaking. The bill would require this information to include, but not be limited to, the following: the racial, gender, and sexual orientation composition of the board of directors or trustees and members of the foundation, the number of grants awarded to specified organizations serving serving ethnic minority communities and lesbian, gay, bisexual, and transgender communities, and the percentage of grant dollars awarded to specified organizations where 50% or more of the board members are ethnic minorities or are lesbian, gay, bisexual, or transgender.

The information collected is to be reported on the foundation's website, if available, under the heading "Diversity."

The purpose behind the bill is unclear, although making information about diversity public suggests that someone will review this information and draw conclusions from it. One type of information refers to the grants made to organizations serving ethnic minority communities and LGBT communities. That type of information seems useful if the goal is to learn about the amount of grantmaking to organizations that fit that definition.

The other types of information being gathered seems odd, not very useful, and intrusive.

One type of diversity being tracked is gender diversity. Is the goal to have an equal number of men and women on boards? Is the goal to increase the number of women on foundation boards? The number of transgendered persons on boards? In terms of grants, should a foundation give a preference to grantees run by women? Should a charity with lots of women members on the board get a preference over a charity with a majority of men? What if the charity with female board members runs an after-school program directed at boys and the charity with male board members runs an after-school program that targets girls? Why does the gender of board composition matter?

What about racial information? The bill itself states that information should be collected based on the following categories: African-American, Asian-American, Pacific Islander, Caucasian, Latino, Native American, and Alaskan Native. Is the goal to increase the representation of people of color on boards? To balance the racial composition of boards among various racial and ethnic groups? Will a board with all African-American members be treated in one way and a board with a mix of Latino, Asian, and African-American members be treated another? What about a board with Latino, American Indian, and Caucasian members?

The requirement to provide information about sexual orientation seems intrusive. Presumably private foundations will require that grant requests include information about the sexual orientation of each board member of the requesting organization? What if board members do not wish to make that information public? Will boards ask for that information when recruiting new board members?

This bill is troubling in many respects. It would be interesting to know more about its origins and purposes.

A survey conducted in Minnesota by the Charities Review Council and the Survey Research Center at St. Cloud State University shows that Minnesotans have a high level of trust in the charities they support. The goal was to determine the level of trust in charities and how that affects giving decisions. Some highlights of the findings:

42% thought employees of charities should receive wages comparable to for-profit employees and 34% thought they should be paid less

83% believe Minnesota charities are ethical

58% thought charities wasted a great deal or a fair amount of money, but Minnesotans thought charities wasted less than government or private business (79% for government and 68% for private business)

three times as many believe that charity watchdog groups should play a larger role in oversight of charities as believe government should increase regulation

College and university endowments are back in the news. The New York Times describes the effect endowments have on the growing gap in financial well-being between a few elite schools with huge endowments and the rest of higher education. A few universities have enormous endowments that continue to grow: Harvard has $34.9 billion, Yale has $22.5 billion, and Princeton has $15.8 billion. These schools can provide significant amounts of financial aid, pay high salaries to professors, build new buildings and research facilities, and provide a variety of benefits to students and professors that other universities can't match.

Faced with the growth of endowments for private schools, and faced with decreases in state assistance, public universities are engaging in increasing amounts of fundraising. At least one state is trying to help. Elliot Spitzer, Governor of New York, recently proposed setting aside $4 billion of state money as an endowment for state colleges.

On January 30 we blogged about Sen. Grassley's continuing concerns about college and university endowments. Continuing press coverage of endowments will keep pressure on colleges to spend more from their endowments and may put pressure on Congress to put some limits on these endowments.

The New York Times reports on an ongoing investigation in California into donations to four museums of artifacts taken from archeological sites in Thailand. Under the scheme smugglers and art dealers sold looted items to Americans for relatively low prices. The buyers then donated the pieces of art to museums, using inflated appraisals for the tax deductions. The tax savings in individual cases are small because the appraisals were set below $5,000. For contributions above that amount, IRC 170(f)(11)(C) requires that a taxpayer obtain a "qualified appraisal" and meet additional requirements. The IRS may subject donations above this amount to greater scrutiny. Thus, the scheme was set up to avoid the stricter requirements and scrutiny.

The IRS, the Interior Department, Immigration, and Customs are all involved in the criminal investigation, and the scope of the investigation reflects concerns not just about lost tax dollars but the losses in the global archeological record. Although the lost federal taxes are small, the cost in the loss of valuable archeological data is huge. When someone loots items from an archeological site, surrounding materials are damaged, items are broken or destroyed, and much information about the artifact is lost because the location and other materials are not catalogued. The investigations have focused on a smuggler and the owners of an Art Gallery who assisted clients in buying and donating the artifacts. Additional indictments may follow.

The Atlanta Journal-Constitution reported yesterday on Sen. Grassley's ongoing attempts to get information from six TV Christian ministries. (Sen. Grassley was in town talking about about other things, but because two of the ministries are based in Atlanta it was a local story.)

On Nov. 6, Sen. Grassley sent a letter to ministers at six ministries, requesting detailed information. One of the six is cooperating, a couple have provided some documents but have not answered all the questions,and at least two have sent letters from lawyers saying they do not intend to cooperate. Grassley says he'll subpoena the documents if necessary, but he hopes that a second letter and some "time to think" may encourage cooperation.

Henry and Martha Kolb entered into an agreement with the city of Storm Lake, Iowa, to establish a garden and a fountain in memory of a grandson who died in a hunting accident. The Kolbs funded a trust to provide money for maintenance of the garden and foundation. Many years later, after both donors had died, the city began an economic development project that required the use of the garden's site. The city and the trustee of the trust, one of the Kolbs' sons, began discussing moving the garden, but before they reached agreement the trustee/son decided to oppose the move. The city continued to move ahead with the development project and destroyed the fountain and garden. The city then requested a modification of the trust in order to move the garden to a nearby site. The district court refused to permit the modification, stating that the trust's purpose had not become "impracticable, Impossible or unlawful to fulfill" except by the city's own action. The appellate court reversed and allowed the modification under the doctrine of cy pres. Although the city created the conditions that made continuing to maintain the garden in the same place impossible, the city was responding to "natural and unavoidable" changes in economic and societal needs. The court concluded that the Kolbs' primary purposes were to create a perpetual memorial to their grandson and to benefit the city. The location was important to them, but had no particular significance other than being a nice setting. The court hinted that if the location had particular significance then location would have been a stronger factor.

The court's opinion provides a detailed look at the doctrine of cy pres in Iowa.

Charity care by hospitals and whether nonprofit hospitals should be treated as charities have been hot issues in recent years. California has just begun posting information reported by California hospitals, including information about the free care and discounted care each hospital provides. California's Hospital Fair Pricing Policies became effective January 1, 2006 and require hospitals to report information to the Office of Statewide Health Planning and Development. That Office had a year to ready the online list, which is now posted on its website.

The stated purpose of the policies and the posted information is to increase public awareness of charity care and discounted care with the goal of making healthcare widely accessible. The interesting byproduct, though, is that the data gives anyone who is interested a chance to compare the level of charity care provided by California hospitals. The data includes whether the hospital operates an emergency room, the federal poverty level required for free care, and the level required for discounted care. The site provides information on a hospital-by-hospital basis, making comparisons time-consuming, but someone concerned about the level of charity care now has access to that data.